A Leveraged Buyout That Doesn’t Deserve the Name
(Bloomberg Opinion) -- Europe’s latest leveraged buyout barely deserves the description. It’s low on borrowed money and doesn’t even involve buying out all the target’s shareholders. That Blackstone Group LP and Hellman & Friedman LLC are willing to swallow such unusual terms says something about the choices private equity firms are facing.
The duo want to buy Scout24 AG, German a classifieds group they previously owned and took public in 2015. They decided to have another bite of cherry after the company’s stock price collapsed last year in the wake of a proposal from lawmakers to upend the economics of the real estate market. Vendors face having to pay estate agents’ fees instead of loading them onto buyers. The knock-on effects for the likes of Scout24 are hard to predict.
The 46 euros-a-share offer is pitched at a hardly racy 27 percent premium to Scout24’s valuation in December, before any bid interest emerged. That is still below where the shares were before investor sentiment soured. At 25 times forward earnings, the firms are paying a somewhat lower multiple of future profits than that paid by Silver Lake for British property listings website ZPG back in July.
But it would be a stretch to say H&F and Blackstone have bagged themselves a bargain. They will be lucky to exit at a higher price-earnings ratio in five years’ time. The duo are seeking only a majority stake and plan to keep the company publicly traded. So the easiest exit route for them is by placing their stock on the open market. Shares of U.K. peers Rightmove Plc and Auto Trader Group Plc already trade at slightly lower multiples.
Returns here won’t be turbo-charged by leverage. The sponsors are buying listed shares. Assume the firms can borrow, at most, 40 percent of the total purchase price. If Scout24's shares return 10 percent annually over five years, the buyout firms would make an internal rate of return of about 15 percent. In a typical private equity deal, leverage would magnify returns rather more.
Finally, H&F and Blackstone are compromising on the structure for the sake of certainty. The high proportion of equity financing means they don’t need to get to the 75 percent ownership level normally demanded by lending banks. Good luck to hedge funds like Elliott Management Corp. which have previously done well by forcing bidders in similar situations to pay stratospheric prices for the last few shares that get them over threshold. The message is clear: don’t bother.
Yet Scout24 shares were trading above the offer level on Friday. Either investors are willing to have a go at holding the sponsors to ransom, or they are betting a strategic buyer will gazump the bid. After such an elongated sale process, and with financing secure in the current structure, that’s a risky bet.
It still looks like an awkward cohabitation. Returns will face an immediate headwind from the likely lower exit valuation. Leverage will – at best – only provide a slight help. And the sponsors will have to coexist with stock-market investors.
So why are Blackstone and Hellman & Friedman bothering? Their backers will be hoping that it’s all about the likely earnings power of Scout24 in five or seven years’ time. This is a winner-takes-all market. Look beyond the commission reforms and Scout24’s future financial performance and dominance could be worth an awful lot more than today. The other explanation may be that the buyout industry, which has raised so much money in recent years, has run out of easy targets.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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